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Integrated Corporate Banking

March 19, 2019 - Jagadish Vema

Any business has its own inherent risks and there is lot of variability involved. There could be market risks of supply demand, liquidity risk, geopolitical risks, human resource risk etc. Well run and efficiently managed corporate businesses internally try to minimize these risks to run a relatively stable business. But is it enough?

Corporates can mitigate significant business risks, not only for themselves, but for all the stakeholders in a supply chain such as vendors, distributors, lenders etc. by harmonizing operations using emerging technologies.

Corporates, for example a manufacturing company, could use Big Data to forecast the demand for their products accurately, which in turn would help them manage orders and existing inventory. Now, when the forecast is near accurate, the variability in procurement orders and human resources can also be stabilized. When raw materials are procured, generally, there is a lead time of around 90 days before payment is made. So, in effect, the raw materials are procured on credit. This is a credit risk to the vendor. Even though the account receivables are shown as current assets in the balance sheet of the vendor, the vendor would require a consistent cash flow to keep his business afloat. When financial institutions like banks participate in vendor-manufacturer relationship with their funds, they can dynamically impact the cash flow for both the vendor and manufacturer and mitigate the credit risk by providing funds on demand.

As soon as the vendor delivers raw materials, the Internet of Things technology can be applied during quality check of the raw materials received, factoring in the returns and approving the Invoice. Though Internet of Things gives real-time status internally to the manufacturer, the resultant data when exposed through open APIs can give information to the bank on the approval of invoice and corresponding amount. Banks can immediately make payments to the vendor on behalf of the manufacturer while opening a loan account for the manufacturer. This greatly reduces the lead time for the vendor. This relationship can be further strengthened by onboarding the vendor, the manufacturer and the bank or banks to a Blockchain network. As a Blockchain network is immutable, all documentation, invoices, bills, QC Certifications etc., can be stored on the Blockchain where access could be given to the relevant stakeholders as per their extent of participation. The information on the Blockchain also be used for credit rating of the parties involved. Similar to the vendor-manufacturer-bank relationship, a manufacturer-dealer-bank relationship could also be maintained on the same Blockchain network. So, when the manufacturer delivers the inventory to the dealer, the same bank could make payment to the manufacturer on behalf of the dealer or adjust it against the loan amount provided earlier.

When multiple banks are part of the Blockchain network, parties in the supply chain like vendor, manufacturer, dealer could go for competitive rates for the credit offered. Banks in turn could assess the credit-worthiness of the supply chain participants as all the documentation in immutable form would be available on the Blockchain. Also, as different banks can offer credit to different stakeholders, banks in a Blockchain network can “talk” to each other to “Pay Off” the loans based on the approval provided by the stakeholders. In effect, the entire cash flow of the supply chain can be managed by the related banks in the Blockchain network while the stakeholders like vendors, manufacturers and dealers can focus on their core competency of making and selling products rather than a non-core competency of cash flow management.

By using emerging technologies like Blockchain and Open APIs, banks can be more than a passive actor (as a lender), become real-time participants and assess credit-worthiness of a business, and in effect help manage the cash flow. Banks can also take pricing decisions based on the real-time information from the operations (through IoT) of the supply chain.

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